If you want to cut back some of your student debt, refinancing may be your best option. Refinancing involves securing a new loan to pay off your current debt. Refinancing can reduce your monthly payment, and interest due on the loan. Plus, refinancing typically is completely free and easy to do. Below, we will walk you through the step-by-step process of how to refinance student loans.
Educate Yourself on Refinancing
Understanding how to refinance student loans requires that you understand the process of refinancing and what is important in a refinance. This will help you navigate your different refinance options and choose the right one for you. Our in-depth guide to student loan refinancing offers a good overview of the topic, so use that as a starting point. Are you a parent looking to refinance your Parent Plus Loans either in your name or your child’s name? We have a Parent Plus loan refinancing guide too.
Can I Refinance Federal Student Loans?
Federal student loans can be refinanced with a private lender, but they cannot be refinanced through any government programs. Federal student loans do have the option of consolidation, which is similar to a refinance but would not reduce your interest rate.
Under federal student loan consolidation, your federal loans get combined under one new loan. You do not get to choose a new loan term or interest rate; everything is standardized. The new loan’s interest rate is simply your weighted average interest rate rounded up to the nearest 1/8%. This actually makes your new interest rate slightly higher than if you were to keep your loans separate.
Why does anyone do it then? Federal consolidation comes with many perks that especially benefit public service workers and those with lower incomes. Consolidated federal loans are eligible for a number of federal student loan forgiveness programs and income-driven repayment plans. These programs help reduce monthly payments, offer forgiveness after a set number of years, and can even cover interest payments.
Decide How Much to Refinance
Before you can refinance, you need to know what amount of money you are refinancing. Log on to your private and federal student loan websites to get accurate totals. Whether you refinance all or just some of your debt is completely up to you. With private refinancing, you can choose to combine federal and private student loans into one new loan. You might want to refinance your higher interest rate loans and keep existing loans that have competitive rates.
Keep in mind that if you choose to do private refinancing with your federal loans, you lose out on the federal protections and forgiveness plans described above. But, you will have a shot at a better interest rate and/or loan term.
Look at Your Refinancing Options
Once you understand refinancing and know how much you want to refinance, you are ready to explore your options. Student loan refinance companies, banks, and credit unions all offer refinancing. Here are some benefits of each:
Refinancing Through Credit Unions
Pros: Credit unions are not-for-profit, so their main goal is to please their members, not pad their bottom line. This means they have the flexibility to offer lower interest rates or better terms. Service is typically better too.
Cons: Only members qualify for credit union refinancing. To become a member, you must meet the CU’s criteria such as living within a certain area, working in a certain field, or attending a particular college. Online or mobile banking is usually limited with credit unions, which can make repayment frustrating.
Refinancing Through Banks
Pros: Anyone can join a bank, so you have a lot of choices. Most banks also have an online and mobile presence for easy payments and account monitoring. Expect discounts for setting up automated withdrawals from your bank account and for having a checking account open at the same bank.
Cons: Large banks do not offer as good of customer service, so it can be hard to get personalized attention. In general, interest rates at banks will be higher than those at credit unions too.
Refinancing Through an Online Lender
Pros: These lenders specialize in refinancing, and their customer service reflects this. Many let you change payment dates, provide unemployment protection (pauses payments until you find a new job), and offer flexible term lengths (not just the standard 5, 10, 15 years).
Cons: Many online lenders only let you refinance if you are a college graduate. College non-completers have to look elsewhere. There is also no physical building for you to go to in order to speak in-person with a lender.
Our Top Picks For Student Loan Refinancing
We work with a number of lenders to help you get the best rates. If you are on a laptop or computer, look to the right-hand side of the screen to see our top refinance picks. Scroll down below the post to see them on mobile. These lenders were hand chosen for their commitment to helping borrowers save money and get out of debt faster.
Apply Directly Online
Once you find somewhere to apply, get started by applying directly online. In most cases, you just need your current loan amount, loan term, annual income, and social security number to get started. Companies only run a soft pull on your credit history during the initial application process, so getting multiple quotes will not negatively affect your credit score.
You may also be asked to choose a new loan term before you get a quote. Just know that you can always go back to the main screen and play around with the number until you get a better deal. It is also easy to add in a cosigner’s information at a later time.
If you would rather talk to a person, some refinance companies do let you apply by phone.
Receive and Compare Offers
Most companies compile offers instantly or within a few minutes. Expect to have choices from each company you apply to. You will have fixed interest rate and variable interest rate offers from each lender. Lenders will also likely offer different interest rates based on the term length.
When comparing offers, focus on term length and interest rates above all else. Fixed interest is typically the best way to go because the rate will not change and monthly payments will stay consistent. The desired term length depends on your situation. If you have the financial stability to handle larger monthly payments, choosing a shorter term length can help you get a better interest rate.
If you have competitive offers from multiple lenders, look to the company’s perks to help you make your decision. Some perks, like a reduced interest rate for making automatic payments, are widely available. Others are more unique. For example, SoFi offers borrowers complimentary career coaching. LendKey grants cosigner release after 12 on-time payments; this lets your cosigner off the hook but still lets you keep the interest rate. Lenders like CommonBond work on a social good model where student loans help fund education for students in need abroad.
Take all of these factors into consideration as you choose your lender. Whoever you end up with, make sure you read through their terms of service and disclosures. The more educated you are about your new loan, the better.
Check Savings with Our Refinance Calculator
Before you sign any important documents, make sure that private refinancing is financially beneficial to you. Thanks to our Refinance Calculator, finding that out only takes a minute. First, plug in your current student loan balance, your current loan term, and your average interest rate (or weighted average interest rate if you are refinancing multiple loans). Then, input the interest rate and term length of your potential new loan.
Is Refinancing Worth It?
Refinancing is worth it when it is financially beneficial. As you look at the refinance calculator results, ask yourself these questions:
- Does this new loan lower my overall interest payments?
- Can I afford this new monthly payment?
- Am I saving money on interest?
- Can I handle this new term length?
If you can answer ‘yes’ to all four questions, refinancing through that lender makes sense. You can afford the new payments and you save money. It is a win-win.
If you answer ‘no,’ to any of the questions, reflect on those questions. Consider trying out a different refinance option. Your second option’s interest rate may not be as low as your top choice’s, but that is okay. It can still end up saving you money, especially if it has a longer term length. Loans with longer term lengths end up having more manageable monthly payments. Just make sure it is still saving you money.
Get Started Refinancing
Now that you know why and how to refinance student loans, there is no excuse not to look into it. It is completely free, will not take up much of your time, and can save you money. At the very least, start improving your credit score so that you can refinance down the road.